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The Fed's big rate cut: what impact?

The lowest rates in more than two generations won't end the recession soon, but analysts see many benefits.

By Ron SchererStaff writers of The Christian Science Monitor, Staff writers of The Christian Science Monitor / December 18, 2008

Fed chair: Ben Bernanke has led the Federal Reserve in lowering short-term rates to nearly zero.

Molly Riley/Reuters/file

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New York and Baltimore

Finally, interest rates are starting to fall for consumers – assuming they can qualify for a loan in the first place.

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Banks are grudgingly lowering some credit-card rates, mortgage rates, and the interest on auto loans. Economists expect those rates to go lower in the weeks and months ahead – something that may eventually help the economy. Even so, and despite that on Tuesday the Federal Reserve lowered short-term interest rates to nearly zero for the first time in at least 50 years, the economy is likely to remain in recession at least until the middle of 2009, many economists say.

"Even with the move by the Fed and a sizable [government] stimulus package, we are forecasting the deepest postwar recession [yet]. We're calling it the 'great recession,' " says Scott Anderson, senior economist at Wells Fargo Economics in Minneapolis. "But there will be some benefits ... of the Fed easing rates."

Here are some ways that the Fed's move, which lowered short-term rates by 0.75 percent, will help ordinary Americans:

•For those credit cards that have a variable rate, interest rates are falling. They've declined from 12.01 percent to 11.77 percent, according to LowCards.com, which tracks more than 1,200 credit-card offerings.

•The interest rates on mortgages also are tumbling. The average contract interest rate for a 30-year fixed-rate mortgage has dropped to 5.18 percent, down from 6.16 percent a month ago, according to the Mortgage Bankers Association (MBA). The Federal Reserve has said it wants these interest rates to remain low.

•Home-equity lines of credit, now at 5.32 percent according to Bankrate.com, will also benefit from the rate cut if they are calculated using the prime interest rate. That rate has fallen by about 0.75 percent with the Fed's latest move. However, home-equity loans, now at 8.22 percent, are not calculated the same way and have not dropped, reflecting the continued deterioration in home values.

•Consumers with impeccable credit ratings can get great deals on auto loans, down to zero percent financing in some cases. But those judged even a bit risky are having a much harder time.

The dropping rates have already created a rush by individuals to refinance their homes. Over the past month, applications have increased 224 percent, according to the MBA.

"For people looking to refinance, it's all about the rate," says Orawin Velz, associate vice president for economic forecasting at the MBA in Washington.

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